UC-NRLF 


37    273 


PROBLEMS 
IN    PRIVATE   FINANCE 


BY 

CHARLES  W.  GERSTENBERG,  Pn.B.,  J.D. 
*\ 

PROFESSOR  OF  FINANCE  AND  HEAD  OF  THE  DEPARTMENT  OF  FINANCE  OF  NEW  YORK 
UNIVERSITY   SCHOOL  OF  COMMERCE,    ACCOUNTS   AND  FINANCE 


1922  EDITION 


PRENTICE-HALL,  INC. 
NEW  YORK  CITY,  N.  Y. 


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Paper 


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r&3V    / 

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Copyright,  1916  and  1922,  by  Charles  W.  Gerstenbcrg 


FOREWORD 

These  problems  were  originally  planned  for  classes  in  Private 
Finance  in  the  School  of  Commerce,  Accounts  and  Finance  of  New 
York  University. 

Some  of  them  have  been  used  over  a  long  period  of  time,  having 
been  submitted  to  the  students  in  mimeograph  form.  As  the  value 
of  solving  problems  of  this  kind  became  more  apparent,  new  prob- 
lems were  added  and  it  was  decided,  for  economy's  sake,  to  print 
them  in  book  form.  The  problems  are  to  be  used  with  MATERIALS 
OF  CORPORATION  FINANCE  and  SYLLABUS  OF  CORPORATION  FINANCE, 
by  the  same  author. 

The  chapters  in  this  problem  book  correspond  with  the  chapters 
in  the  syllabus. 


4834 


PROBLEMS  IN  PRIVATE  FINANCE 

CHAPTER  I 

Before  beginning  the  study  of  these  problems  the  students  should 
study  very  carefully  the  chart  on  pp.  22  and  23. 

1.  If  you  alone  were  about  to  engage  in  one  of  the  following 
businesses,  would  you  form  a  corporation    or  conduct  the  business 
as  an  individual  proprietorship:  the  manufacture  of  automobiles; 
professional  accountancy ;  local  grocery  store ;  mail  order  business  ? 

2.  A  partnership   does   a   very   successful   business    and   grows 
rapidly,  constantly  adding  new  partners.    They  desire  to  organize 
in  the  most  efficient  manner   and  to  delegate  certain  duties  and  au- 
thorities to  certain  partners,  restricting  each   partner  to  the  duty 
and  authority  delegated.    How  may  they  accomplish  their  purpose? 

3.  A  sells  his  interest  in  the  partnership  A-B  to  C.   What  rights 
hasC? 

4.  Suppose  that  A  and  B  had  an  agreement  to  conduct  a  partner- 
ship for  five  years,  and  that  at  the  end  of  one  year  A  withdrew. 
First,  what  would  happen?    Second,  what  could  B  do? 

5.  A,   B  and  C  are  partners,   investing  as   follows:     A,   cash, 
$30,000;  B,  property  valued  at  $20,000;  C,  cash,  $10,000.     During 
the  first  year  A  withdrew  $6,000;  B,  $4,000;  and  C,  $2,000.   At  the 
end  of  the  year,  after  deducting  withdrawals,  the  partnership  has 
$6,000  to  divide  as  profits  among  the  partners.    Nothing  was  said 
in   the   partnership  agreement   as    to   the   method   of    dividing   the 
profits' or  as  to  withdrawals.    How  should  the  profits  be  divided? 

If  the  partne-^hip  agreement  provided  that  "profits  and  losses 
shall  be  divided  in  proportion  to  the  contribution  of  capital,"  what 
division  would  be  made? 

6.  A,  B  and  C  are  partners,  investing  respectively  $60,000,  $40,- 
000  and  $20,000.    B  lends  the  partnership  $40,000.    The  firm  owes 
outside  creditors  $100,000.   The  firm  dissolves  and  realizes  $200,000 
on  its  assets.   How  should  that  amount  be  divided  ? 

7.  X,  Y  and  Z  are  in  partnership  and  have  invested  $75,000  in 
the  partnership  business  in  equal  shares.   Aside  from  the  investment 
in  the  business,  X  has  $25,000,  Y  has  $35,000  and  Z  has  $50,000  inj 
cash,  marketable  stock  and  bonds  not  invested  in  any  other  busi- 
ness. The  partnership  owes  $99,000  and  is  about  to  dissolve.  X  owes 
to  individual  creditors  $18,000,  Y  owes  $30,000  and  Z  owes  $25,000 
All  the  creditors  demand  immediate  payment  of  their  debts  and  a 
receiver  is  appointed  to  take  over  the  assets  of  the  partnership  anc 
of  all  the  partners.   How  should  their  assets  be  divided? 


6  PROBLEMS  IN  PRIVATE  FINANCE 

8.  If,  in  the  above  problem,  the  X,  Y,  Z  firm  had  been  incor- 
porated, would  you  change  your  answer  ? 

9.  If  you  were  to  co-operate  with  other  persons  in  the  conduct 
of  the  following  enterprises,  would  you  organize  as  a  partnership : 
a  street  railway;  oil  production;  retail  clothing;  investment  bank- 
ing; aeroplane  manufacture? 

10.  A  entrusted  B  with  $10,000  for  use  in  the  business  of  heating, 
ventilating,  etc.,  and  for  no  other  use  whatever.    For  this  A  was  to 
receive  6  per  cent  and  one-half  of  the  net  profits  of  the  business.  He 
was  also  to  have  a  right  to  require  quarterly  statements  of  its  trans- 
actions and  the  right  to  withdraw  his  money  at  any  time.   The  busi- 
ness fails.   Can  the  creditors  hold  A  liable  as  a  partner?     (See  115 
N.  Y.,  625.) 

11.  Can  you  suggest  a  method  by  which  A's  liability   (in  the 
above  problem)   could  have  been  definitely  limited  to  the  $10,000 
contributed,  A  still  obtaining  one-half  of  the  profits,  B  remaining 
personally  liable  to  creditors,  and  the  business  suffering  none  of  the 
disadvantages  of  incorporation? 

12.  A  is  a  special  partner  in  a  limited  partnership  of  A,  B  and  C, 
which  does  business  and  has  its  certificate  filed  in  New  York  State. 
A,  B  and  C  open  a  branch  in  New  Jersey.    A  lives  in  New  Jersey 
and  owns  property  in  New  Jersey.    Partnership  A,  B  and  C  fails. 
What  right  has  X,  a  creditor,  living  in  New  Jersey? 

13.  If    A,    a   member    of   the    Pierce-Fordyce    Oil    Association 
(p.  6),  sells  his  interest  to  C,  will  C  have  any  rights  other  than 
those  he  had  in  problem  3  ? 

14.  Could  the  members  of  the  partnership,  referred  to  in  prob- 
lem   2,    accomplish    their    purpose    by    organizing    a    joint-stock 
company  ? 

15.  (a)   Refer  to  articles  of  the  Pierce-Fordyce  Oil  Association 
in  MATERIALS.     The  member's  certificate  of  interest  on  p.  7  pro- 
vides that  "no  member  of  this  association  shall  be  liable  for  any 
debts,  covenants,  damages  or  torts  of  this  association  beyond  the 
limit  of   his   shares."    Is  this  provision  in   itself  binding  on  third 
parties  who  become  creditors  of  the  association? 

(b)  If  not,  what  further  steps  are  necessary? 

(c)  What  additional  provision  do  we  find  in  the  articles  of  asso- 
ciation to  protect  the  shareholders  and  make  the  above  provision 
binding  on  third  party  creditors? 

(d)  Suppose  the  board  of  governors  do  not  refer  to  the  agree- 


8  PROBLEMS  IN  PRIVATE  FINANCE 

ment  in  a  contract,  and  the  person  with  whom  they  were  dealing 
knew  nothing  about  these  articles  of  association.  Could  the  creditors 
look  to  the  individual  members  of  the  Pierce-Fordyce  Oil  Asso- 
ciation ? 

(e)  What  right  would  the  members  have  if  the  board  of  gov- 
ernors neglected  to  refer  to  the  articles  of  association  in  any 
contract  ? 

16.  Suppose  that  the  members  of  this  class   were  to  form  a 
partnership.     There  are  50  students  in  the  class.     How  many  per- 
sons would  there  be? 

17.  Suppose  that  we  have  formed  a  corporation  and  that  each 
one  of  us  is  a  stockholder  in  this  corporation.    How  many  persons 
will  there  now  be  in  the  room? 

18.  A,  B  and  C  are  members  of  the  X  corporation,  which  owns 
a  block  of  land  under  contract  of  sale  to  Z.     A,  B  and  C  sign  the 
deed  and  deliver  it  to  Z.   Does  Z  get  title? 

19.  X,  Y  and  Z,  three  persons,  sell  out  their  entire  partnership 
to  A,  with  an  ancillary  promise  not  to  engage  in  business  under 
the  firm  name.   They  incorporate  the  X-Y-Z  Company,  in  the  same 
line  of  business.    May  A  restrain  the  company  from  doing  business 
on  the  basis  of  the  contract  itself  ?  On  any  other  principle? 

20.  If  in  the  3rd  problem  the  business  were  a  corporation  and 
not  a  partnership,  would  your  answer  be  different? 

21.  Draw  up  a  simple  form  of  by-laws  for  the  Hamilton  Auto- 
mobile Co.  (p.  82).   You  may  use  the  United  States  Steel  Corpora- 
tion's By-Laws,  p.  66,  as  a  guide,  but  they  should  be  simplified. 

22.  How  much  would  you  pay  the  State  of  New  York  for  the 
right  to  begin  business  as  a  corporation   with  a  capitalization  of 
$5,000,000?    (See  chart,  p.  51.) 

23.  How  much  would  you  have  to  pay  the  State  for  the  right 
to  begin  business  as  a  partnership,  investing  $5,000,000  in  the  busi- 
ness?  As  a  joint-stock  company?   As  a  Massachusetts  Trust? 

24.  A,  B  and  C  are  general  partners  doing  a  retail  dry  goods 
business  in  New  Jersey.   They  decide  to  do  business  in  New  York. 
Must  they  pay  any  special  taxes  before  they  "can  begin  business? 

25.  Suppose  A,  B  and  C  were  incorporated  for  $100,000.   Would 
they  be  required  to  pay  any  special  tax  before  they  could  begin  busi- 
ness in   New   York,   assuming   that  the  company   owned   property 
worth  $1,000  located  in  New  York,  and  $9,000  of  property  located 
elsewhere  ? 


10  PROBLEMS  IN  PRIVATE  FINANCE 

26.  Suppose  that  A,  B  and  C  were  incorporated.     Would  they 
be  required  to  pay  any  special  tax  before  they  could  begin  business 
in  New  York? 

27.  Would  your  answer  be  different  if  the  business  were  con- 
ducted as  a  joint-stock  company?  As  a  trust? 

28.  All  the  stockholders  of  the  A  company  die.    The  directors 
are  not  stockholders,  not  being  required  to  be  stockholders  by  the 
by-laws  of  the  corporation.    What  should  the  directors  do? 

29.  If  the  shareholders  of  the  Pierce-Fordyce  Oil  Association 
(p.  6)  died,  would  its  Board  of  Governors  take  action  different  from 
that  taken  by  the  directors  of  A  company  (above)  ? 

30.  If  the  shareholders  of  the  Massachusetts  Electric  Companies 
(p.  11)  died,  what  would  the  Trustees  do? 

31.  All  the  directors  of  the  X  Company  die.    The  by-laws  pro- 
vide that  vacancies  in  the  board  of  directors  shall  be  filled  by  a 
special  election  held  by  the  board  of  directors.    The  next  annual 
meeting  of  the  X  Company  is  not  scheduled  to  be  held  for  ten 
months.   What  should  be  done? 

32.  Who  has  the  title  to  the  property  of  the  Massachusetts  Electric 
Companies  ? 

33.  Are  the  members  of  this  enterprise  liable  as  partners  ?  What 
changes  are  necessary  to  remove  this  liability? 

CHAPTER  II 

1.  Under  what  kinds  of  laws  were  the  General  Electric  Com- 
pany   (pp.  26-33)    and  the  United   States   Steel   Corporation    (pp. 
59-65),  respectively,  created? 

2.  If  you  were  to   form  a  business,  like  which  of   these  two 
corporations  would  you  form  it? 

3.  Point  out  the  difference  in  purpose  and  scope  between  the 
^certificate  of  incorporation  of  the  United  States  Steel  Corporation 
(pp.  59-65)  and  the  by-laws  (pp.  66-79)  of  that  corporation. 

4.  A,  B  and  C  offer  the  Secretary  of  State  a  certificate  of  in- 
corporation providing  for  two  classes  of  stock,  one  of  which,  like 
Bethlehem  Steel  B  stock  (p.  763),  will  have  no  voting  power.   The 
Secretary  of  State  refuses  to  file  it,  on  the  ground  that  stockholders 
have  the  right  to  vote  for  directors  and  that  this  right  cannot  be 
taken  away  from  them.    Will  the  courts  compel  him  to  accept  it? 

5.  Company  X  has  two  classes  of  stock,  common  and  preferred. 
A  holds  one  share  of  preferred.    At  a  meeting  of  the  stockholders 


12  PROBLEMS  IN  PRIVATE  FINANCE 

it  is  moved  and  seconded  that  the  certificate  be  amended  to  increase 
the  preferred  dividend  from  7  to  8  per  cent  and  to  offset  this  by 
depriving  the  preferred  stock  of  its  voting  power.  A  objects.  What 
right  has  A? 

6.  A,  an  I.  W.  W.  leader,  buys  one  share  of  common  stock 
in  the  U.  S.  Steel  Corporation,  and  six  months  later  demands  at  the 
office  of  the  company  a  list  of  the  stockholders,  with  their  addresses, 
that   he   may   write  to  the  stockholders   remonstrating  against  the 
labor  policy  of  the  company.    Will  the  company  be  justified  in  re- 
fusing him  the  list?     (See   S.   C.  L.1  of   N.  Y.,   Sec.   32;  N.  J., 
Sec.  33.) 

7.  A,   in   problem   6,    also   demands   that    he   be   permitted   to 
inspect    the   cash-books,    ledgers    and    other    financial    books.     The 
company    refuses   him   permission.      What   are   his    rights?      (See 
S.  C.  L.  of  N.  Y.,  Sec.  69.) 

8.  If  A  were  a  director,  would  he  have  any  right  to  inspect  these 
books  ? 

9.  A  partnership  has  incorporated  its  business  and  it  asks  you 
to  provide  the  necessary  books.    What  books  will  you  procure? 

10.  Read  pages  99  and  100.    Suppose  that  the  by-laws  of  the 
X  Company,  a  New  York  Corporation,  provided  that  a  majority 
of  the  stockholders  in  interest  might  ratify  a  mortgage.    Directors 
ask  the  stockholders  to  ratify  a  mortgage.    Of  $12,000,000  capital 
stock,  nine  million  is  represented  at  the  meeting,  six  million  vote  in 
favor  of  the  mortgage,  three  million  against.    Will  the  bonds  be 
valid  legal  obligations  of  the  company? 

11.  If  the  meeting  referred  to  on  page  89  had  been  called  by  a 
notice  similar  to  that  on  page  88  (with  the  necessary  changes  of 
•dates),  would  the  action  of  the  stockholders  in  authorizing  the 
foond  issue  have  been  legal? 

12.  The  by-laws  of  the  X  Corporation  provide  that  "at  any 
meeting  of  the  stockholders,  51  per  cent  of  the  capital  stock  of  the 
company,  present  in  person  or  represented  by  proxy,  shall  con- 
stitute a  quorum  for  all  purposes,  unless  the  representation  of  a 
larger  number  shall  be  required  by  law,  and,  in  that  case,  the  rep- 
resentation of  the  number  so  required  shall  constitute  a  quorum." 
Of  100  shares  of  capital  stock,  A  owns  50  and  B  owns  50.  A  con- 
trols two  directors  and  B  one.  The  annual  meeting,  at  which  direc- 
tors are  to  be  elected,  is  to  be  held.  A  and  B  have  a  disagreement. 


1  S.  C  L.  refers  to  Stock  Corporation  Law ;  the  Business  Corporation  Law 
will  be  referred  to  as  B.  C.  L.,  and  the  General  Corporation  Law  as  G.  C.  L. 


14  .PROBLEMS  IN  PRIVATE  FINANCE 

What  should  A  do  to  insure  a  continuation  of  his  control?    (See 
S.  C.  L.  of  N.  Y.,  Sec.  25;  also  15  A.  D.  530;  N.  J.,  Sec.  34.) 

13.  A  sells  his  stock  to  B,  who  neglects  to  transfer  the  stock  on 
the  books  of  the  company.    A  and  B  both  appear  at  the  meeting. 
Which  should  be  given  admittance?    (See  G.  C.  L.  of  N.  Y.,  Sec. 
23;  N.  J.,  Sec.  40.) 

14.  The  Statute  of  the  State  of   Maine  does  not  refer  to  the 
question  of  the  method  of  voting  by   stockholders.    Suppose  that 
you  bought  a  majority  of  the  stock  of  a   Maine  corporation  and 
wanted  to  elect  its  board  of  directors,  what  would  you  do?    How 
could  you  make  the  rules  of  the  State  of  New  York  on  the  ques- 
tion of  voting  apply  to  a  Maine  company?    (See  G.  C.  L.  of  N.  Y., 
Sec.  23 ;  N.  J.,  Sec.  36.) 

15.  If  you  were  the  presiding  officer  at  a  stockholders'  meeting 
of  a  New  York  corporation  and  the  stockholders  claimed  the  right 
of  cumulative  voting,  what  would  you  do?    (See  G.  C.  L.  of  N.  Y., 
Sec.24;NJ.,Sec.38j4.) 

16.  Assume  that  nine  directors  are  to  be  elected  by  the  California 
Petroleum  Corp.  (pp.  101-104)  and  that  the  company  has  issued  its 
maximum  stock  provided  by  its  certificate.   How  many  shares  would 
you  have  to  own  to  elect  six  of  the  directors  under  the  cumulative 
plan  of  voting? 

17.  If  you  own  501  shares  out  of  3,000  voting  shares,  how  many 
of  the  five  directors  can  you  safely  seek  to  elect? 

18.  Under  the  cumulative  plan  of  voting,  how  many  shares  of 
the  United  States  Steel  Corporation  (assuming  that  the  total  capital 
stock  has  been  issued)  would  you  require  to  elect  a  majority  of  the 
directors  whose  terms  expire  each  year?    (See  pp.  59-65.) 

19.  Imagine  the  names  of  the  directors  whom  you  are  to  put  in 
control   of    the   United    States    Steel    Corporation   under   the   plan 
mentioned  in  the  last  problem.    Draw  up  a  ballot  as  per  form  given 
on  page  90. 

20.  Suppose  you  sent  in  the  proxy  given  on  page  88  and  then 
wanted  to  attend  the  meeting  yourself.    What  could  you  do  about 
the  matter? 

21.  As  far  as  you  can  determine  from  the  voting-trust  agreement 
given  on  pages  91-97,  is  it  valid? 

22.  Would  the  said  agreement  be  valid  if  it  applied  to  a  New 
York  corporation?    If  not,  how  could  it  be  made  valid?    (G.  C.  L. 
of  N.  Y.,  Sec.  25.) 

23.  The  creditors  of  an  insolvent  New  Jersey  company  agree  not 


16  PROBLEMS  IN  PRIVATE  FINANCE 

to  foreclose  if  they  can  get  control  of  the  company  till  it  pays  for 
its  bonds.    Can  you  suggest  a  method  of  accomplishing  this  end? 

24.  Can  you  suggest  any  purposes,  other  than  those  already  sug- 
gested, for  which  a  voting  trust  could  be  formed? 

25.  How  may  the  objects  obtained  through  the  voting  trust  be 
secured  permanently? 

26.  Very  briefly  describe  what  are  likely  to  be  the  duties  of  the 
officers,  committees,  agents  and  departments  of  the  Westinghouse 
Electric  Company.    (Refer  to  pp.  627-629.) 

27.  Draw  a  chart  of  the  organization  of  the  Westinghouse  Elec- 
tric Company. 

CHAPTER  III 

1.  Refer  to  page  762.    What  was  the  capital  stock,  the  capitaliza- 
tion, and  the  capital  of  the  Bethlehem  Steel  Corporation  in  1911? 

2.  Is  the  certificate  given  on  page  150,  as  it  now  stands,  negoti- 
able?    (Study  pp.   111-116.    Notice  that  the  law  was  not  enacted 
in  New  York  until  September  1,  1913.    Certificates  of  stock  dated 
before  the   enactment   of   the   law   are   not   negotiable.    The   same 
law  was  passed  in  New  Jersey  in  1916.    It  has  also  been  enacted  in 
Louisiana,  Maryland,  Massachusetts,  Michigan,  Ohio,  Pennsylvania, 
Rhode  Island,  Tennessee,  Wisconsin  and  Alaska.) 

3.  A  owns  certificate  No.  5  for  100  shares  of  the  X  Company, 
dated  September  1,  1905.    He  endorses  it  in  blank  and  loses  it.    B 
finds  it  and  sells  it  to  C,  who  knew  of  the  loss.    C  gives  it  to  D.    D 
sells  it  to  E,  who  knew  nothing  of  its  past  history.    E  sells  it  to  F, 
who  knew  of  the  past  history  of  the  certificate.   Does  F  get  the  title? 

4.  Suppose  that  the  same  certificate  had  been  transferred  by  D 
to  his  own  name  before  the  stock  was  sold  to  E.    Would  D  get  the 
title?  Would  E  get  the  title?   Would  E  get  any  right? 

5.  What  remedies  in  the  above  two  cases,  if  any,  would  A  have? 

6.  Suppose  that  the  certificate  mentioned  in  problem  4  had  been 
dated  September  1,  1917.   Would  your  answer  be  different? 

7.  Suppose  that  Faith  Jones  wanted  to  send  the  certificate  on 
page  150  to  her  broker  ready  for  delivery.    How  could  she  do  this 
without  danger  of  loss  and  without  incurring  a  double  stock-transfer 
tax?    (Study  pp.  117-121  and  see  foot  of  p.  160  and  top  of  p.  161.) 

8.  Mary  Smith,  unmarried,  is  a  customer  of  your  brokerage  and 
bond  house.   She  marries  John  Anderson  and  writes  for  advice  on  the 
following. questions  :    ( 1 )  How  should  I  have  certificates  made  out  in 
the  future?    (2)  How  can  I  get  the  old  certificates  I  hold  in  various 
companies  transferred  to  my  new  name?  (Refer  to  rules  pp.  171-175.) 


18  PROBLEMS  IN  PRIVATE  FINANCE 

9.  Faith  Jones  transfers  her  stock  to  you  by  assignment  endorsed 
on  the  certificate.    The  company  refuses  to  make  the  transfer  unless 
the  signature  of  the  transferor  is  accompanied  by  a  stock  exchange 
member's  guarantee  or  a  notarial  certificate.    Is  the  demand  justi- 
fied?   (See  pp.  174-175,  paragraph  vi.) 

10.  (1)   Company  M  is  formed  for  $500,000. 

(2)  $50,000  of  its  stock,  par  value,  is  sold  and  issued  to 

each   of   the   following  persons :   A,    B,    C,   D   and 
E,  10  per  cent  paid. 

(3)  Company  calls  10  per  cent.     All  calls  are  responded  to. 

(4)  Company  sells  $25,000  of  its  stock  to  F  for  patent. 

(5)  Company  issues  another  call  for  10  per  cent.    A  does 

not  respond  and  his  stock  is  forfeited. 

(6)  F  donates  $10,000  of  his  stock  to  the  company. 

(7)  Company  sells  $25,000  to  G  at  105. 

(8)  Company  sells  all   its   remaining  stock    (both  unissued 

and  treasury  stock)   to  H  without  subjecting  H  to 
any  future  liability  on  it,  at  the  lowest  price  possible. 
Fill  in  the  following  table  step  by  step : 

12345678 
Authorized 
Unissued 
Issued 
Outstanding 
Treasury 
Part  paid 
Full  paid 
Forfeited 

(See  pp.  174-175,  paragraph  vi.) 

11.  How  much  stock  did  the  company  sell  at  the  end  and  what 
price  did  it  receive  for  the  stock?    (S.  C.  L.  of  N.  Y.,  Sec.  56; 
N.  J.,  Sec.  21.) 

12.  Draw  up  a   form   of   stock   ledger  and   enter   in   it  all   the 
transactions  described  in  problem  No.  10. 

13.  (a)   If  H  had  bought  the  stock  at  20,  would  he  be  liable  to 

the  company  for  any  sum  thereon? 

(b)   Would  he  be  liable  in  any  way?    (S.  C.  L.  of  N.  Y., 
Sec.  56  and  57;  N.  J.,  Sec.  21.) 

14.  H  transferred  the  stock  to  Y  for  $100  a  share  and  Y  had  no 
notice  or  information  of  what  H  paid  for  it.    The  stock  is  marked 
"full  paid  and  non-assessable."    Would  Y  have  any  liability  on  the 


20  PROBLEMS  IN  PRIVATE  FINANCE 

stock?    (S.  C.  L.  of  N.  Y.,  Sec.  56;  N.  J.,  Sec.  21;  see  also  Ersfeld 
v.  Exner,  128  A.  D.,  135.) 

15.  In  each  of  the  above  problems,  would  the  directors  have 
any  personal   liability?     (See  White,   Frost  or   Harrison   on   New 
York  Corporations.) 

16.  The    Wisconsin    Edison    Company    (pp.    43-46)    sells    100 
shares  of  common  stock  to  A  for  $3,600.   Has  A  any  liability  on  the 
stock?    (pp.  47-50.) 

17.  Assume  that  the  Wisconsin  Edison  Company,  after  paying 
all  operating  expenses  and  other  charges  and  dividends  on  the  pre- 
ferred stock,  has  a  surplus  of  $1,000,000.    The  directors  decide  to 
pay  out  the  entire  surplus  in  dividends.   Assume  that  all  the  stock  is 
issued  and  outstanding.    Draw  up  the  resolution  of  the  directors 
declaring  the  necessary  dividend. 

CHAPTER  IV 

1.  Refer  to  the  charters  of  the  General  Electric  Company   (p. 
26),  Wisconsin  Edison  Company  (p.  43),  the  Atchison,  Topeka  and 
Santa  Fe   (p.  54),  the  U.  S.  Steel  Corporation   (p.  59)   and  parts 
of  the  certificate  of  incorporation  of  the  California  Petroleum  Com- 
pany (p.  101),  the  Chicago,  Milwaukee  and  St.  Paul  Ry.  Company 
(p.  105),  the  May  Department  Stores  (p.  107),  Western  Maryland 
Rd.  Company   (p.   1011),  and  American  International  Corporation 
(p.  1013),  and  tell  which  of  the  following  characteristics  the  stock 
of  each  has : 

Voting 

Non-voting 

Vetoing 

Preferred  as  to  assets 

Not  preferred  as  to  assets 

Cumulative  preferred 

Non-cumulative 

Non-participating 

Participating 

Participating  immediately 

Manager's  participating 

Convertible  preferred   (See  S.  C.  L.  of  N.  Y.,  Sec.  61.) 

Redeemable  preferred 

Protected  preferred 

2.  The  certificate  of  incorporation  of  A  Company  says  that  the 
stock  shall  be  divided  into  two  classes,  one  of  which  shall  be  com- 


22  PROBLEMS  IN  PRIVATE  FINANCE 

mon  and  the  other  7  per  cent  preferred.  Is  the  preferred,  voting  or 
non-voting  (G.  C.  L.  of  N.  Y.,  Sec.  23);  preferred  as  to  assets; 
cumulative  or  non-cumulative  (See  84  N.  Y.  157)  ;  participating,  non- 
participating  or  participating  immediately;  convertible  (S.  C.  L.  of 
N.  Y.,  Sec.  61)  ;  redeemable;  protected? 

3.  State  as  to  each  form  mentioned  in  problem  1,  whether  the 
variation  from  the  normal  common  stock  is  a  variation  which  effects 
the  control,  income,  or  risk  of  the  stockholders. 

4.  Explain  how  J.  P.  Morgan  undertook  to  use  the  redeemable 
feature  in  the  preferred  stock  of  the  Northern  Pacific  in  1901  to 
retain   control   of   that   company    from   J.   J.   Hill.     ( Lyon's    Capi- 
talisation. ) 

5.  Explain  the  difference  in  prices  between  Bethlehem  Steel  7 
per  cent  preferred  and  common  stocks  in  1916.    (See  pp.  761-763.) 

6.  What  are  the  quotations  for  American  Brake  Shoe  &  Foundry 
Company  preferred  and  common  stocks?    Explain  the  difference  in 
prices. 

7.  In   1913   National  Lead  Common,  paying  3%  without  much 
prospect  of  increase,  was  selling  around  60.    Preferred  never  went 
above  108,  although  it  is  a  7%  cumulative  preferred,  paying  divi- 
dends at  that  rate.    Explain. 

8.  In  1916  Gulf   States  first  7  per  cent  cumulative  preferred, 
preferred  as  to  assets  and  dividends,  sold  at  115;  the  second  6  per 
cent  non-cumulative  preferred  sold  as  high  as  190.   Explain  the  dif- 
ference in  prices. 

9.  Assume  a  company  has  $5,000,000  of  common  stock  and  $7,- 
500,000  of  8  per  cent  preferred  stock.    How  much  would  each  class 
get  if  the  company  distributed  its  entire  surplus  of  $6,000,000  under 
the  following  circumstances? 

(1)  The  preferred  is  participating; 

(2)  The  preferred  is  non-participating; 

(3)  The  preferred  is  participating  immediately; 

(4)  The  preferred  is  cumulative  non-participating,  and  has 
not  received  dividends  for  four  years  past; 

(5)  The  preferred  is  same  as    (4),  except  that  preferred 
stock  is  participating  immediately ; 

(6)  The  preferred  is  same  as  (4)  except  that  preferred  stock 
is  participating. 

10.  Has  the  May  Department  Stores  (pp.  767-8)  lived  up  to  its 
obligations  to  its  preferred  stockholders?     (pp.  107-110.) 


24  PROBLEMS  IN  PRIVATE  FINANCE 

CHAPTER  V 

1.  In     1916    the    Bethlehem    Steel    Corporation    needed    over 
$30,000,000  for  the  purchase  of  new  property. .  This  money  is  bor- 
rowed at  5%  interest.    Would  it  have  been  more  profitable  for  the 
shareholders  to  sell  additional  stock?    (See  pp.  761-763.) 

2.  Plot  the  gross  and  net  earnings  and  fixed  charges  of  the  fol- 
lowing  companies:    Bethlehem   Steel    Corporation    (pp.   761-763); 
May  Department  Stores  (pp.  767-768)  ;  Chicago,  Milwaukee  &  St. 
Paul    (pp.   753-759) ;    British   Westinghouse   Company    (p.    640)  ; 
French  Westinghouse  Company   (p.  644)  ;  The  Connecticut  Com- 
pany (p.  695)  ;  New  York  &  Stamford  Railway  Company  (p.  698). 

3.  (a)   Prepare  a  table  showing  the  following  averages  for  each 
of  the  above  companies,  including  as  many  years  as  are  included  in 
the  Materials  book  for  each  company. 

(1)  The  total  average  amount  of  stock. 

(2)  The  total  average  amount  of  interest  bearing  indebt- 
edness. 

(3)  The  financial  risk. 

(b)  Do  these  companies  seem  to  have  followed  the  rule  that 
companies  with  stable  gross  income  can  borrow  relatively  more  than 
those  with  variable  gross  earnings  ? 

4.  .  Suppose  that  in  1902  a  stockholder  of  the  United  States  Steel 
Company  had  asked  you  how  he  ought  to  vote  on  the  questions 
raised  by  the  Notice  of  Meeting  on  p.  89,  what  advice  would  you 
give  and  what  reasons  would  you  assign?     (See  Ripley's   Trusts, 
Pools  and  Corporations,  pp.  149-181.) 

5.  Can  you  think  of  any  reasons,  other  than  those  on  pp.  354-5, 
why  public  utility  commissions  insist  on  being  shown  that  bonds  will 
earn  interest,  while  they  do  not  demand  proof  that  stock  can  earn 
dividends  ? 

6.  The   law  of   a  certain   State  provides  that   no   corporation's 
bonded   indebtedness  may  exceed  the  amount  of  its  capital  stock. 
Company  X  has  issued  bonds  equal  to  the  amount  of  its  common 
stock,  which  is  all  outstanding,  and  which  is  selling  at  45.     The 
Company  needs  more  money.    What  should  it  do? 

7.  Company  A's  average  gross  earnings  for  ten  years  have  been 
$1,000,000  and  its  operating  ratio  60%.  Interest  on  its  first  mortgage 
bonds  is  $200,000  and  on  its  second  mortgage  bonds  $100,000  and  on 
its  third  mortgage  bonds  $50,000.   Its  gross  earnings  decreased  10% 
and  40%   of  its  operating  expenses  decreased  proportionately,  the 
remaining  60%  being  fixed. 


26  „    PROBLEMS  IN  PRIVATE  FINANCE 

(a)  What  was  the  operating  ratio  in  the  poor  year? 

(b)  What  was  the  factor  of  safety  protecting  the  first,  second 
and  third  mortgage  bonds  in  the  average  or  normal  year, 
and  what  was  the  factor  of  safety  for  the  same  issues 
in  the  poor  year  ? 

(c)  What  was  the  decrease  in  the  factor  of  safety  protecting 
the  several  issues? 

8.  Refer  to  pp.  749-50.     (a)   How  many  times  did  the  company 
earn  its  interest  in  1914? 

(b)  What  per  cent  did  the  company  earn  on  its  issued  stock? 

(c)  What  is  the  net  working  assets  of  the  company  and  for 
how  many  years  would  this  provide  interest  payments? 

9.  In  dollars  and  cents :    (a)   What  was  the  security  back  of  the 
bonds  of  the  American  Smelting  and  Refining  Company  in  1914? 
(b)   What  was  the  equity?     (c)   What  was  the  security  back  of  the 
stock?    (pp.  759-60.) 

CHAPTER  VI 

1.  Briefly  summarize  the  contents  of  the  real  estate  mortgage 
(pp.   176-182)   and  point  out  the  corresponding  clauses  in  the  cor- 
porate mortgage  (pp.  183-9). 

2.  During  the  life  of  a  mortgage   (pp.   176-182,  211-215),  who 
has  possession  of  the  property? 

3.  Explain  very  briefly  the  promises  of  the  mortgagor  contained 
in  Article  II  of  the  Jones-Laughlin  mortgage  and  the  possible  con- 
tingencies against  which  these  promises  protect  the  mortgagee. 

4.  Who  has  the  right  to  foreclose  the  Jones-Laughlin  mortgage  ? 
(pp.  228  and  233-4.) 

5.  Name  the   mortgagor   and   mortgagee   in  each  of   the   mort- 
gages   beginning   on    the    following    pages    respectively:    176,    183, 
255,  291. 

6.  Are  the  mortgages,  beginning  respectively  on  pp.  183,  255  and 
291,  closed  end,  open  end,  or  limited  open-end   mortgages?     (pp. 
196-7,266-7,291-9.) 

7.  Just  what  does  the  trustee  do  when  it  authenticates  an  issue 
of  bonds?    (p.  192.) 

8.  Draw  up  a  resolution  to  be  used  by  the  Board  of  Directors 
of  the  Jones-Laughlin  Steel  Company  in  order  to  procure  an  authen- 
tication of  $3,000,000  worth  of  bonds,  the  proceeds  to  be  used  for 
alterations   in  the  company's  plant.    Assume  that  only  $5,000,000 
par  value  of  bonds  are  outstanding  under  the  mortgage  (pp.  196-7.) 


28  PROBLEMS  IN  PRIVATE  FINANCE 

9.  Assume   that   the   company   has   outstanding   $18,000,000   of 
bonds  secured   by  the   Jones-Laughlin   mortgage.      State   generally 
how  the  company  can  procure  the  authentication  of  bonds  for  the 
purpose  of  building  a  new  plant.    If  any  papers  have  to  be  executed, 
state  briefly  the  contents  of  such  papers   (pp.  197-200).     Why  are 
the  requirements  governing  the  issue  of  these  bonds  different  from 
those  governing  the  issue  of  the  bonds  referred  to  in  the  preceding 
problem  ? 

10.  Which  of  the  restrictions  mentioned  in  the  SYLLABUS  protect 
the  income  of  the  bondholders  and  which  protect  the  principal? 

11.  Of  the  six  restrictions  named  in  the  SYLLABUS,  which  are 
contained  in  the  Jones-Laughlin  mortgage? 

12.  Company  X  is  formed  to  acquire  C,  and  to  take  over  Cor- 
porations A  and  B.   It  authorizes  a  $5,500,000  issue  of  bonds,  with 
the  proceeds  of  $2,000,000  par  value  of  which  it  acquires  property  C. 
The  remaining  $3,500,000  of  bonds  are  reserved  to  refund  bonds 
which  have  been  issued  by  corporations  A  and  B,  amounting,  re- 
spectively, to  $1,000,000  and  $2,500,000.    The  mortgages  securing 
the  several  issues  of  bonds  contain  "after-acquired'*  clauses.    The 
X  Company  succeeds  in  refunding  $500,000  par  value  of  the  A  bonds 
and  $1,500,000  of  the  B  bonds.   Company  X  then  fails  and  the  three 
properties  are  sold  separately,  bringing  in  $600,000,  $1,000,000  and 
$1,900,000  for  properties  A,  B  and  C  respectively.   What  percentage 
of  the   face  value  of  their  investments   would  the  holders  of  the 
various  issues  of  bonds  each  receive?  Pay  no  attention  to  expenses  of 
foreclosure,  taxes,  etc. 

13.  In  the  above  problem,  what  liens  had  the  bondholders  on 
each  of  the  properties:    (a)  before  any  refunding;   (b)  at  the  time 
,of  the  company's  insolvency? 

14.  What  additional  provisions  or  covenants  could  you  insert  in 
the  agreement  securing  the  notes  or  bonds  on  pp.  291-298  to  give 
ihe  security  holders  greater  protection,  without  creating  a  mortgage? 

CHAPTER  VII 

1.  Where  is  the  "after-acquired"  clause  in  the  Jones-Laughlin 
mortgage?   What  is  the  purpose  and  effect  of  this  clause? 

2.  Public  Utility  Co.  X  has  outstanding  a  $5,000,000  closed-end 
mortgage.    It  wants  to  extend  its  property  into  new  territory,  and 
expects  to  spend  $1,000,000  a  year  for  12  years.   Its  average  annual 
surplus,  after  payment  of  5  per  cent  dividends  on  its  stock,  amounts 


30  PROBLEMS  IN  PRIVATE  FINANCE 

to  about  $200,000.  Show  by  diagram  and  explanation  how  the 
company  can  best  finance  the  extension:  (a)  Assuming  that  the 
$5,000,000  mortgage  has  no  "after-acquired"  clause,  (b)  Assuming 
that  it  has  an  "after-acquired"  clause? 

3.  Explain  and  give  the  reasons  for  the  statement  contained  in 
the  last  sentence  on  p.  929,  beginning  "This  policy,"  etc. 

4.  Briefly  explain  the  content  and  purposes  of  the  agreements 
on  pages  299-312  and  pages  313-19. 

5.  What  is  the  security  behind  the  "Equipment  Notes"  (pp.  301- 
303),  and  to  what  sources  may  the  noteholders  look  for  payment 
each  year  ? 

6.  Show  by  diagram  the  amount  >cf  bonds  outstanding  from  year 
to  year,  and  the  value  of  the  cars  year  by  year,  assuming  they  de- 
preciate to  a  junk  value  of  $80,000  over  a  period  of  20  years.    Does 
the  equity  increase  or  decrease  each  year? 

7.  Can  you  suggest  other  kinds  of  businesses  that  could  finance 
acquisitions  through  the  issuance  of  similar  notes?* 

8.  The  N.  Y.,  N.  H.  and  H.  R.  R.  Company  guarantees  the  in- 
terest on  the  bonds  of  the  N.  Y.  W.  and  B.  Ry.  Company  (pp.  751- 
752).    Is  the  amount  to  be  paid  by  the  N.  Y.,  N.  H.  and  H.  R.  R. 
Company  a  fixed  charge  of  that  company?    If  not,  under  what  cir- 
cumstances would  it  be? 

9.  What  is  the  security  behind  the  bonds  of  the  Mortgage  Bond 
Company?   (pp.  255-290.) 

10.  Suggest  other  kinds  of  companies  by  which  this  method  of 
financing  may  be  used  to  advantage. 

11.  Which  is  the  better  form  of  collateral  to  secure  collateral 
trust  bonds — stock  or  bonds  ?   Give  reasons. 

12.  What  provision   is   contained  in   the   Jones-Laughlin   mort- 
gage protecting  the  bondholders   against  a  dissipation  of   the  sur- 
plus of   subsidiary   companies   whose   stock   is  held   by  the  Jones- 
Laughlin  Company  as  security  for  the  bondholders?   (p.  214.) 

13.  Company  A  obtained  control  of  Company  B  by  exchanging 
for  the  latter 's  stock  an  equal  amount    ($5,000,000)    of   collateral 
trust  bonds.    At  the  time  the  transfer  took  place,  the  B  Company 
had  a  surplus  of  $1,000,000.    What  provisions  do  you  think  ought 
to  be  included  in  the  collateral-trust  agreement  to  protect  the  bond- 
holders against  a  dissipation  of  this  surplus  ? 

14.  What  provisions  are  contained  in  the  Jones-Laughlin  mort- 
gage protecting  the  bondholders  against  manipulation  of   the   sub- 
sidiarv  companies?    (pp.  206-209;  219;  225.) 


32  PROBLEMS  IN  PRIVATE  FINANCE 

15.  Corporations  A,  B  and  C  have,  respectively,  6,  12  and  24 
directors.    Each  corporation  has  provision  for  cumulative   voting. 
They    are    capitalized    as    follows:       A,     $12,000,000    com.;     B, 
$12,000,000   com.,  $12,000,000   p'f'd;    C,    $18,000,000   com.,   $12,- 
000,000  p'f'd  non-voting.    Stock  of  Co.  A  is  selling  at  80;  of  Co. 
B  at  60  for  com.  and  100  for  p'f'd;  of  C,  70  and  50,  respectively. 
With  what  minimum  investment  could  you  get  control  of  the  entire 
system  ?  Explain  how  you  could  finance  the  acquisition. 

16.  What  advantage  does  the  parent  company  (for  example,  the 
Bethlehem  Steel  Corporation)   obtain  by  guaranteeing  a  subsidiary 
company's  (i.  e.,  Fore  River  Shipbuilding  Corporation)  bonds? 

17.  Would  it  not  be  more  advantageous  for  the  parent  company 
to  sell  its  own  bonds  ? 

18.  Suppose  that  a  subsidiary  of  the  Jones-Laughlin  Steel  Co. 
wanted  to  acquire  property  worth  $500,000  and  did  not  have  suf- 
ficient accumulated  earnings  for  this  purpose ;  how  could  the  acquisi- 
tion be  financed?   (pp.  199  and  207.) 

CHAPTER  VIII 

1.  Is  bond  (1)  (p.  325)  a  "purchase-money  mortgage"  bond? 

2.  Is  the  Jones-Laughlin  bond  a  "first  mortgage"  bond?    (See 
pp.  196  and  205.) 

3.  Is  bond  (3)    (p.  325)  secured  by  a  first  mortgage  on  all  the 
property  ? 

4.  Are    "consolidated    first-mortgage    bonds"    usually    secured 
wholly  by  a  first  mortgage?   If  not,  why  is  a  corporation  justified 
in  calling  the  bonds  "first-mortgage  bonds"  ? 

5.  Co.  A  is  unable  to  pay  interest  on  its  third-mortgage  bonds. 
A  receiver  is  appointed  who  sees  the  necessity  of  improving  the 
property.    The  court  orders  him  to  sell  certificates.    What  lien  will 
the  holders  of  these  certificates  have  on  the  property  ? 

6.  Suppose  it  could  be  shown  that  the  sale  of  the  receiver's  cer- 
tificates mentioned  in  problem   5   would  materially  strengthen  the 
position  of  the   second   mortgage   bondholders,   would   you  change 
your  answer? 

7.  Read  Rule  4  on  page  353.    Assuming  that  the  bond  in  ques- 
tion ran  for  ten  years,  and  that  an  equal  amount   was  laid  aside 
annually  during  the  life  of  the  bond  to  make  up  the  discount,  at 
what  rate  of  interest  could  the  company  sell  its  bonds  at  par  without 
imoosinp  "a  greater  annual  payment  upon  consumers"? 


34  PROBLEMS  IN  PRIVATE  FINANCE 

8.  Are  the  adjustment  income  bonds  of  the  Hudson  and  Man- 
hattan Railroad  Company  (pp.  933-65)  cumulative,  non-cumulative, 
profit-sharing,  debenture,  or  mortgage,  bonds?    (pp.  939-40.) 

9.  How  is  the  interest  to  which  the  bondholders  are  entitled  de- 
termined? (pp.  939-940.)  Of  what  advantage  is  this  to  the  company? 

10.  Have  the  holders  of  the  adjustment  income  bonds  of   the 
Hudson  and  Manhattan  Co.  at  the  present  time  any  control  over 
the  company?    (p.  940.)    This  will  necessitate  looking  up  the  finan- 
cial record  of  the  company  during  the  last  few  years. 

11.  Does  the  holder  of  a  Jones-Laughlin  bond  have  to  pay  the 
federal  normal  income  tax  on  the  interest  received?    What  effect 
has  this  on  the  price  of  the  bond  ? 

12.  What  changes  would  be  made  in  the  Jones-Laughlin  bond 
(pp.  190-1)  to  make  it  a  bond  registered  as  to  principal?    A  fully 
registered  bond  ? 

13.  Is  there  any  difference  between  a  coupon  bond  and  a  fully 
registered  bond  endorsed  in  blank? 

14.  What  kind  of  a  bond  is  most  like  a  share  of  stock?    (The 
elements  of   similarity  to  be  considered  are  income,   risk,   control, 
form,  and  term.) 

15.  What  kind  of  a  share  of  stock  is  most  like  a  bond? 

16.  As  commodity  prices  rise,  which  would  you  prefer  to  have, 
a  share  of  stock,  or  a  bond? 

17.  Why  do  coupon  bonds   frequently  sell  a  trifle  higher  than 
the  registered  bonds  of  the  same  issue?     (See,  e.g.,  some  of  the 
U.  S.  Government  bond  issues  in  the  Annalist.) 

CHAPTER  IX 

1.  May  stock  be  issued  convertible  into  bonds  at  the  option  of 
the  stockholder?  At  the  option  of  the  company?    (S.  C.  L.  of  N.  Y., 
Sec.  61.) 

2.  May  a  company  sell  its  bonds  at  80  and  make  them  convertible 
into  stock,  par  for  par?    (S.  C.  L.  of  N.  Y.,  Sec.  56-61.) 

3.  Southern  Pacific  convertible  5's  are  convertible  into  the  stock 
of  that  company,  par  for  par.   At  what  price  is  each  selling? 

4.  Which  usually  sell  the  higher,  convertible  bonds  or  the  stock 
into  which  they  are  convertible?  Give  reasons,    (pp.  324-325.) 

5.  Southern  Pacific  convertible  4's  are  convertible  into  common 
stock  at  130.   At  what  price  is  each  selling?   Explain  the  difference 
in  price.  What  would  happen  if  the  stock  approached  nearer  to  130? 


36  PROBLEMS  IN  PRIVATE  FINANCE 

6.  If  Southern  Pacific  convertible  5's  were  selling  at  the  same 
price  as  the  stock,  which  would  you  buy — the  stock,  or  the  bonds? 
Why? 

7.  Explain  the  mathematics  of  protecting  short  sales   (pp.  428- 
429)  by  the  purchase  of  convertible  bonds. 

8.  Conversion   is  a  privilege  of  the  bondholder   or  noteholder. 
What  reasons  prompt  a  corporation  to  make  its  bonds  convertible? 

9.  Read  Rule  5,  p.  354,  before  solving  this  problem.    A  com- 
pany has  an  issue  of  $1,000,000  of  bonds  which  are  sold  at  80  and 
bear  interest  at  the  rate  of  6  per  cent.  A  proposition  is  now  made  to 
refund  the  bonds  at  110,  out  of  the  proceeds  of  the  new  issue  of  4  per 
cent  bonds  to  be  sold  at  80  and  to  run  for  the  same  time  as  the  un- 
expired  term  of  the  old  bonds,  viz.,  75  years.   Assume  that  the  com- 
pany puts  through  the  proposition,  and  arranges  to  retire  during  the 
life  of  the  bonds  and  in  equal  annual  amounts,  the  bonds  required 
to  be  issued  in  excess  of  $1,000,000  in  order  to  carry  out  the  proposi- 
tion.   How  much  will  the  company  save,  making  no  allowance  for 
interest  on  annual  savings  of  interest? 

10.  If  you  held  a  note  of  the  Chicago  Elevated  Railways  (see  p. 
1009),  what  questions  would  you  have  determined  before  deciding 
whether  or  not  to  agree  to  the  extension  of  the  notes?   Would  you 
change  your  answer  if  you  had  been  a  stockholder  as  well? 

11.  Would  your  answer  be  different  in  the  case  of  the  Toledo 
Traction  Company  bonds?    (p.  320.) 

12.  Suppose  that  the  holder  of  bond  No.  26  of  the  Pensacola 
and  Atlantic  R.  R.  Co.  (p.  336)  does  not  surrender  his  bond  for  re- 
demption ;  what  will  happen  ? 

13.  Wrhat  are  all  the  other  disadvantages  to  the  investor  of  re- 
deemable bonds? 

14.  What  offsetting  advantage  does  the  company  usually  offer? 
(pp.  220-221 ;  325-336  and  1022.) 

15.  Why  are  the  redemption  prices  of  the  Bethlehem  Steel  Cor- 
poration notes  (p.  1022)  fixed  at  varying  rates? 

16.  Is    the    redemption    feature    of    the    Jones-Laughlin    bonds 
"mandatory"  ior  "solicited"?    (pp.  220-223.) 

17.  Where  redemption  is  solicited,  will  the  price  demanded  by 
bondholders  be  more,  or  less,  than  the  market  price? 

18.  What  effect  has  the  redemption  feature  on  the  price  of  the 
notes  ? 


38  PROBLEMS  IN  PRIVATE  FINANCE 

19.  A  company  is  about  to  raise  $10,000,000  for  which  it  will 
pay  8  per  cent.    Should  it  issue  long-term  redeemable  bonds,   re- 
deemable at  108,  or  should  it  issue  short-term   (2-year)  notes  and 
pay  a  2  per  cent  commission  to  the  issuing  bankers,  assuming  that 
high  money  rates  are  expected  to  last  for  about  six  years? 

20.  Suppose  interest  rates  were  very  high  (i.  e.,  7  per  cent  or 
more)  and  the  Jones-Laughlin  Steel  Co.  wanted  to  raise  $5,000,000 
for  additions  and  improvements.    Assume  that  $20,000,000  of   its 
5  per  cent  mortgage  bonds  (pp.  190-191)  had  previously  been  issued. 
What  would  you  advise  the  company  to  do  ? 

21.  Why  are  the  maturities  of  the  Mississippi  County,  Arkansas 
Drainage  District  Bonds  (p.  1026)   and  the  table  of  drawings  for 
the  amortization  of  the  bonds  >of  the  Mortgage  Bond  Company  (pp. 
261-262)  arranged  as  they  are? 

22.  What  are  the  differences  between  the  methods  employed  in 
the  21st  problem  and  the  method  employed  to  retire  the  Erie  Equip- 
ment Trust  Notes?    (pp.  299-312.) 

23.  What  method  of  making  payments  into  the  sinking  fund  is 
required   on   the   Jones-Laughlin   mortgage?     (pp.   219-220.)     Can 
you  suggest  any  reasons  for  employing  a  sinking  fund  here? 

24.  For  what  kinds  of  companies,  respectively,  is  each  of  the 
methods  of  making  payments  into  a  sinking  fund,  as  described  in 
the  SYLLABUS,  better? 

25.  What  method  of  investing  the  sinking  fund  is  employed  in 
the  Jones-Laughlin  mortgage?   (pp.  219-223.) 

26.  Of  the  three  methods   of  investing  sinking-fund  payments 
described  in  the  SYLLABUS,  which  do  you  consider  the  most  advan- 
tageous (a)  for  the  corporation;  (b)   for  the  investor? 

27.  What  difference  does  it  make  whether  the  bonds  are  can- 
celed or  kept  alive:  (a)  to  the  corporation;  (b)  to  the  investor? 

28.  Prepare  tables  showing  in  tabular  form  the  annual  amount 
of  sinking  fund,  annual  amount  of  interest  accrued  on  bonds  held  in 
sinking  fund,  total  amount  to  invest  each  year   (from  October   1, 
1915,  to  April  1,  1929),  amount  of  bonds  purchased  annually  for 
sinking  fund,  annual  cash  balance,  and  total  amount  of  bonds  held  in 
sinking  fund  each  year,  where  the  issue  is  $1,000,000  5  per  cent 
15-year  bends,  due  April  1,  1929;  interest  payable  April  1  and  Octo- 
ber 1.    Issue  to  be  purchased  or  drawn  each  year  at  par  and  kept 
alive  by  the  trustee,    (pp.  1023-1025.) 

29.  A  steel  company  has  outstanding  $2,000,000  5  per  cent  bonds 


40 


PROBLEMS  IN  PRIVATE  FINANCE 


due  in  three  years,  and  redeemable  at  105.  The  mortgage  requires 
the  company  to  pay  $50,000  annually  into  the  sinking  fund.  The 
treasurer  of  the  company  reports  to  its  directors  that  it  has  over 
$2,000,000  on  hand  which  it  cannot  profitably  use  in  the  business. 
He  advocates  the  redemption  of  the  bonds  at  105,  claiming  that  this 
will  save  the  company  $100,000  a  year  in  interest  and  $50,000  a 
year  in  sinking  fund  payments.  As  a  director  of  the  company,  would 
you  vote  in  favor  of  the  treasurer's  recommendation? 

CHAPTER  X 

1.  What  advantages  were  to  be  derived  through  the  consolida- 
tion of  the  New  York  Central  Lines?    (pp.  548-554.) 

2.  What  other  reasons  prompt  business  enterprises  to  Combine? 

3.  What  are  some  of  the  disadvantages  of  combination  as  shown 
by  the  Starch  Consolidations.    (See  Dewing,  Corporate  Promotions 
and  Reorganizations.)    Can  you  suggest  any  other  disadvantages? 

4.  Corporation  A  has  powers  X,  Y  and  Z.    Corporation  B  has 
powers  X  and  Y.   May  they  consolidate?    (B.  C.  L.  of  N.  Y.,  Sec. 
7;  N.  J.,  Sec.  104-109;  see  also  75  N.  J.  Eq.,  p.  229,  and  Dewing, 
Corporate  Promotions  and  Reorganizations,  p.  44.) 

5.  Briefly  discuss  the  three  methods  of  distributing  securities  in 
the  formation  of  consolidations.    (See  Political  Science  Quarterly, 
Vol.  30,  pp.  277-300.) 

6.  Three  corporations,  A,  B  and  C,  call  upon  you  to  draw  up 
a  financial  plan  for  their  consolidation.   The  balance  sheets,  together 
with  the  net  earnings,  of  the  three  companies  are  as  follows : 


Assets 
Plants  

Co.  A 
$300000 

Co.  B 
$180,000 

Co.C 
$80,000 

Materials  and  supplies  .... 

100,000 

20,000 

20,000 

Accounts  receivable   

....'.     80,000 

60,000 

40,000 

Cash  

20,000 

10,000 

10,000 

$500,000  $270,000  $150,000 
Liabilities 

Accounts  payable  $70,000  $30,000  $20,000 

Capital   350,000  200,000  100,000 

Surplus    80,000  40,000  30,000 


$500,000    $270,000    $150,000 
Average  annual  net  income $32,000      $36,000      $48,000 


42  PROBLEMS  IN  PRIVATE  FINANCE 

Assume  that  a  fair  rate  of  return  in  this  business  is  8  per  cent; 
that  each  company  will  take  care  of  its  own  indebtedness  with  its 
own  current  assets,  and  that  the  necessary  working  capital  will  be 
raised  by  the  sale  of  5  per  cent  bonds.  Draw  up  a  memorandum  of 
consolidation  showing  the  kinds  of  securities  that  are  to  be  issued  by 
the  consolidated  company,  the  distribution  of  them,  and  the  increase 
or  decrease  in  income  to  the  stockholders  of  each  company. 

(a)  Allow  nothing  for  economies  of  consolidation,  except  that 
the  company  will  pay  interest  on  the  bonds  out  of  expected  earnings. 
Divide  the  stock  partly  on  the  basis  of  gicod  will  and  partly  on  the 
basis  of  assets. 

(b)  Allow   nothing    for    economies    of   consolidation.     Base   the 
distribution  of  securities  exclusively  on  earning  power. 

(c)  Assume  that  the  consolidated  company  will  be  able  to  earn 
interest  on  the  bonds  and  $20,000  more  than  total  earnings  of  the 
three  separate  companies  and  that  these  increased  earnings  will  be 
due  to  the  good  management  of  the  better  concerns  extending  over 
the  poorer  concerns. 

(d)  Assume  that  the  consolidated  company  will  be  able  to  earn 
interest  on  the  bonds  and  $20,000  more  than  total  earnings  of  the 
three  separate  companies  and  that  these  increased  earnings  will  be 
due  to  the  increase  of  assets.     (See  pp.  276-280  of  first  edition,  pp. 
346-351  of  second  edition,  Cole's  Accounts,  Their  Construction  and 
Interpretation. 

7.  Explain  the  purposes  of  the  various  clauses  in  the  agreement 
on  pp.  538  to  541. 

8.  Company  A  has  outstanding  $1,000,000  stock,  $500,000  bonds 
and  $200,000  unsecured  debts ;  Company  B  has  outstanding  $2,000,- 
000  stock,  $750,000  bonds  and  $100,000  unsecured  debts.   They  con- 
solidate into  Company  5C,  which  exchanges  its  stock  for  the  stock 
of  Companies  A  and  B,  share  for  share.    Company  X  then  issues 
Consolidated  First  Mortgage  Bonds  amounting  to  $1,000,000,  and 
incurs   trade  debts  amounting  to  $300,000.    Suppose  none   of  the 
debts  of  Company  A  and  Company  B  or  Company  X  have  been  paid. 
By  diagram  and  explanation,  show  what  are  the  respective  rights  of 
the  various  creditors,  bondholders  and  stockholders  of  the  various 
properties.    (B.  C.  L.  of  N.  Y.,  Sec.  11 ;  N.  J.,  Sec.  107.) 


44  PROBLEMS  IN  PRIVATE  FINANCE 

CHAPTER  XI 

1.  Is  it  easier  to  consolidate  two  companies,  or  to  accomplish  the 
same  purpose  by  the  sale  of  all  the  assets  of  one  company  to  the 
other?   What  difference  is  there  between  the  two  methods  of  form- 
ing intercorporate  relations,  as  far  as  the  rights  and  liabilities  of 
stockholders   and   creditors  are  concerned?     (B.   C.   L.  of    N.   Y.. 
Sec.  7-11;  S.  C.  L.  of  N.  Y.,  Sec.  16-17;  N.  J.,  104-105  and  31.) 

2.  A  and  B,  partners,  sell  out  their  business  to  A-B  Company, 
taking  in  payment  all  the  stock  of  the  company. 

(a)  What  rights  have  the  creditors  of  the  partnership? 

(b)  If  the  partners,  after  acquiring  the  stock,  gratuitously 
transferred   it   to   their   wives,   would   your   answer   be 
different? 

(c)  Would  they  have  any  additional  rights  if  the  stock  were 
turned  over  directly  to  the  wives  of  the  partners? 

3.  What  does  the  Boston  Elevated  Railroad  Company  pay  the 
West  End  Street  Railway  Company  as  rent?    (pp.  555-569.) 

4.  What  basis  of  rent  would  you  suggest  as  equitable  in  case 
the  landlord  were  the  owner  of  a  copper  mine  to  be  operated  by 
the  tenant  ? 

5.  In  the  absence  of  a  specific  contract,  is  the  lessee  bound  to 
pay  interest  on  the  lessor's  bonds? 

6.  Should  the  lessee  contract  or  agree  to  pay  the  interest  on  the 
bonds  of  the  lessor  company  as  part  of  the  rent?   Why? 

7.  Is  the  rent  paid  by  the  Boston  Elevated  Railway  Company  a 
fixed  financial  charge?    How  is   it  treated  in  the  reports  of   rail- 
roads?   (See  pp.  625,  666,  1010.) 

8.  If  the  Boston  Elevated  Railroad  Company  were  to  improve 
the  property,   who  would   own  the   improvements   at   the  termina- 
tion of  the  lease,  in  the  absence  of  any  special  agreement? 

9.  Explain  in  detail  how  "permanent  additions,  alterations  and 
improvements"  to  the  lessor's  property  are  financed  under  the  West 
End  Street  Railway  lease,    (pp.  560-1.) 

10.  What  covenants  are  contained  in  the  Boston  Elevated  and 
West  End  Street  Railway  lease  providing  against  manipulation  of 
the  landlord's  property  by  the  tenant?    (p.  562.) 

11.  In  computing  the  per-mile  capitalization  of  the  New  York. 
New  Haven  and  Hartford  for  the  purpose  of  comparing  it  with  a 
similar  railroad,  would  you  add  the  capitalization  of  the  leased  lines 


46  PROBLEMS  IN  PRIVATE  FINANCE 

to  the  capitalization  of  the  N.  Y.,  N.  H.  and  H.,  or  would  you  add 
the  capitalized  rentals?    (p.  725.) 

12.  A    small   gas   company   is   serving   a   suburban   community. 
Part  of  its  territory  is  annexed  to  a  city  in  which  low  rates  prevail. 
What  should  the  company  do  to  protect  itself  ? 

13.  Fifty-one  per  cent  of  the  stockholders  in  interest  of  corpora- 
tions A  and  B  are  desirous  of  consolidating  the  business;  but  the 
other  forty-nine  per  cent  object.   May  the  majority  effect  the  desired 
result  in  any  other  way?   (See  Beverage  v.  N.  Y.  Elevated  R.  R.  Co., 
112  N.  Y.  1;  N.  J.  Corp.  Law,  Sec.  133.) 

14.  Company  A  leased  Company  B's  property  for  forty  years 
at  an  annual  rental  of  eight  per  cent  on  the  $1,000,000  capital  stock 
of  B.    The  present  appraised  value  of  B's  property  is  $2,500,000. 
Company  A  is  now  in  need  of  permanent  capital  of  $500,000,  but 
finds  that  it  has  mortgaged  all  the  property  it  owns  outright,  and 
that  its  credit  is  not  strong  enough  to  borrow  on  debenture  bonds. 
What  would  you  suggest? 

CHAPTER  XII 

1.  Under  what  circumstances  may  a  corporation  in  New  York 
State  hold  stock  in  another  corporation?    (S.  C.  L.  of  N.  Y.,  Sec. 
52;  N.  J.,  Sec.  196-198.) 

2.  Chart  the  intercorporate  relations  of  the  N.  Y.,  N.  H.  and  H. 
R.  R.  Co.  (pp.  663-780).    Indicate  exactly  the  kind  and  degree  of 
control  exercised. 

3.  Show  by  diagram  the  genealogy  of  Company  X,  the  following 
facts  being  known : 

In  1870  Corporation  A  was  incorporated  with  $100,000  capital 
stock.  This  stock  was  increased  in  1875  to  $1,000,000,  in  which  year 
Corporation  B  was  organized  with  a  capital  stock  of  $500,000.  In 
1880  A's  capital  stock  was  increased  to  $2,000,000.  Corporation  B 
was  leased  to  Corporation  A,  and  in  1885  Corporation  A  failed  and 
was  reorganized  into  Company  C.,  in  the  same  year  stockholders  of 
B  assuming  control  of  their  own  company.  B  and  C  consolidated 
into  Company  D  in  1890  with  a  capitalization  of  $5,000,000.  In 
1895  D  consolidated  with  Company  E,  which  was  organized  in  1880 
with  a  capitalization  of  $1,000,000,  and  with  Company  F,  which  was 
organized  in  1870  with  a  capitalization  of  $500,000  and  which  was 
increased  to  $2,000,000  in  1880.  The  new  consolidation  was  Company 
G  with  a  capital  stock  of  $10,000,000,  which  was  increased  to  $20,- 


48  PROBLEMS  IN  PRIVATE  FINANCE 

000,000  in  1900.  In  1905  it  organized  a  subsidiary,  AA,  with  a 
capitalization  of  $500,000;  in  1910  another  subsidiary,  BB,  with  a 
capitalization  of  $1,000,000.  In  1915  Company  G  consolidated  with 
Company  J  to  form  Corporation  K  with  a  capitalization  of  $50,- 
000,000.  J  was  the  result  of  a  consolidation  of  Corporations  H  and 
I,  organized  respectively  in  1875  and  1885  with  capitalizations 
respectively  of  $6,000,000  and  $9,000,000,  having  exchanged  with 
Company  J's  stock  share  and  share  alike.  In  1920  Company  K 
reorganized  into  Company  X  with  a  capitalization  of  $40,000,000. 

4.  How  does  the  affixing  of  the  proxy  to  the  notice  of  meeting 
(p.  88)   affect  the  control  of  the  United  States  Steel  Corporation? 

5.  Make  an  outline  of  the  brief,  setting  forth  the  advantages  of 
holding  companies  in  the  public  utility  field,    (pp.  570-582.) 

6.  A  book  publishing  concern  proposes  to  publish  a  magazine. 
Suggest  a  method  of  financing  the  venture,  pointing  out  the  superior- 
ity of  your  plan  over  other  possible  plans,  and  also  pointing  out  any 
weaknesses  that  may  be  advanced  against  your  plan. 

7.  Several  large  department  stores,  some  of  which  are  corpora- 
tions and  others  partnerships,  desire  to  combine  their  delivery  sys- 
tems.   Suggest  a  method  of  doing  this,  and  point  out  the  advantages 
and  disadvantages  of  your  plan. 

8.  A  law  is  passed  in  Texas  which  prohibits  an  oil  company  from 
operating  a  pipe-line.    The  X  Oil  Company  owns  certain  pipe-lines 
from  which  it  makes  a  large  profit.    What  can  the  X  Company  do? 

9.  Explain  very  briefly  the  nature  of  the  plan  for  the  consolida- 
tion of  the  Electric  Railway  Companies  (pp.  526-535)  and  how  it 
is  to  be  consummated.   Do  not  use  figures,  but  merely  state  the  prin- 
ciple in  broad  outline. 

10.  Explain  in  the  same  way  the  nature  of  the  plan  for  con- 
solidation on  pp.  522-525. 

11.  Explain  in  the  same  way  the  general  nature  of  the  agree- 
ment on  pp.  516-521. 

12.  Does  this  agreement  differ  in  principle  from  the  one  on  pp. 
511-515?   If  so,  how? 

13.  How  do  these  agreements  differ  in  principle  from  those  on 
pp.  499-510? 

14.  What  kind  of  a  pool  (see  SYLLABUS)   is  the  one  created  by 
the  agreement  on  pp.  496-498? 


50  PROBLEMS  IN  PRIVATE  FINANCE 

CHAPTER  XIII 

1.  What  will  be  the  amount  required  for  fixed  capital  and  for 
working  funds  for  the  projected  interurban  railroad  described  in  the 
Engineer's  Report  (pp.  457-88)  ? 

2.  From  statistics  of  other  interurban  railways,  does  it  appear 
that  the  amounts  thus  estimated  are  understated? 

3.  What  facts  are  given  in  the  report  to  show  that  the  second 
principle  underlying  the  "discovery"  of  the  enterprise  will  be  com- 
plied with? 

4.  From  statistics  of  other  interurban  railways  do  you  believe 
the  operating  revenues  are  overstated  and  the  operating  costs  under- 
stated ? 

5.  What,  according  to  the  report,   (p.  488)  will  be  the  form  of 
capitalization  of  the  projected  company? 

6.  Assuming  all  the  estimates  are  conservative,  do  you  think  the 
company  could  be  "floated"  on  the  basis  outlined  in  problem  No.  5? 

7.  Show  how  each  of   the  steps  in  promotion  is  illustrated  in 
the  complaint  of  Haskins  v.  Ryan.    (pp.  489-95.) 

8.  Of  the  various  items  of  cost  mentioned  on  page  455  which 
may  be  charged  to  (a)  financing  during  construction,  (b)  financing 
construction,  and  (c)  financing  business  ? 

9.  Do   you   agree   with   Mr.    Bemis's   conclusions   as   to   "going 
concern"  value,  pp.  822-4? 

10.  Are  the  owners  of  the  properties  which  are  to  be  consolidated 
(pp.  526-35)  to  be  paid  in  stock  or  in  cash? 

11.  What  was  the  basis  of  capitalization  for  the  consolidations 
formed  in  Chapter  X,  problems  6  and  7. 

12.  Why  is  it  wise  for  private  businesses  to  incorporate  on  the 
basis  of  average  earning  power  rather  than  on  the  basis  of  actual  in- 
vestment ? 

13.  Why  should  public-service  corporations  capitalize  on  the  basis 
of  actual  investment  or  appraisal  value? 

14.  A  owns  a  piece  of  land   (Plot  No.   1),  inherited  from  his 
father,   reasonably   worth   $20,000.    Five  years  thereafter  he   pur- 
chases, from  X,  Plot  No.  2  for  $15,000.    Each  plot  appreciates  in 
value,  $1,000  a  year.   At  the  end  of  five  years  A  conceives  the  idea 
of  getting  his  money  out  of  the  land  by  selling  to  a  company  which 
he  purposes  organizing.    The  company  is  formed  in  the  following 
year,  but  in  the  meantime  A  purchases  another  plot   (No.  3)    for 
$10,000.   For  how  much  may  he  sell  all  the  property  to  the  company? 


52  PROBLEMS  IN  PRIVATE  FINANCE 

15.  Under  what  circumstances  could  A  make  a  bargain  "at  arm's 
length"  with  the  company? 

16.  Company  A  is  being  promoted  by  X  and  Y.    X  sells  stock 
to   M  on  the  representation  that  the  company  has  an  oil  well  in 
operation.   The  statement  is  not  true ;  the  company  fails  and  M  loses 
his  money.    What  rights  has  he? 

17.  A  offers  to  sell  his  plant  to  a  corporation  of  which  he  is  a 
promoter.    He  writes  to  the  dummy  directors:    "I  paid  compara- 
tively little  for  my  plant  twenty  years  ago,  but  have  added  much 
to  the  investment.    Moreover,   I  want  to  be  very  frank  with  you 
and  say  that  while  I  believe  my  plant  is  worth  more  than  I   um 
offering  it  to  you  for,  I  don't  think  I  could  get  as  much  from  a 
cash  buyer.    Of  course,  you  are  to  pay  in  stock  which  may  turn 
out,  under  the  company's  management,  not  to  be  worth  a  dollar." 
Is  this  statement  sufficient  to  entitle  A  to  deal  with  the  company 
"at  arm's  length"  ? 

18.  When  you  find  that  a  promoter  has  made  a  secret  profit, 
under  what  various  circumstances  would  you  use  each  of  the  three 
remedies  mentioned  in  the  SYLLABUS  ? 

19.  Write  a  biography   (about  1,000  words)   of  one  of  the  fol- 
lowing:   J.  P.  Morgan  (the  late),  E.  H.  Harriman,  J.  J.  Hill  (the 
late),    Daniel    Drew,    Commodore    Vanderbilt,    Jay    Gould,    Henry 
Ford,  J.  D.  Rockefeller  (Sr.),  Andrew  Carnegie  (the  late),  Stephen 
Girard,   Charles   M.   Schwab,   John   N.  Willys,   Lord   Leverhulme, 
George  W.   Perkins,   Samuel  Insull,   Otto  H.   Kahn.    Pay  especial 
attention  to  their  early  careers. 

20.  -Write  a  short  account  of  the  promotion  and  first  two  years  of 
existence  of  the  United  States  Steel  Corporation. 

21.  Write  up  the  Alton  case.    (pp.  920-8.) 

CHAPTER  XIV 

1.  Assume  that  A  owns  $5,000  shares  of  stock  and  $500,000  worth 
of  bonds  of  the  Hartford  and  N.  Y.  Transp.  Co.  (pp.  749-750).  The 
company   increases    its    capital    stock   by   $2,500,000.     A    syndicate 
offers  to  buy  all  of  the  new  stock  at  $125.    All  of  the  stockholders 
except  A  agree  to  accept  the  offer  of  the  syndicate.    A  objects. 
Later  the  company  sells  to  the  syndicate  all  of  the  new  stock  at  $125. 
Immediately  thereafter  the  stock  is  quoted  at  $150  per  share.   What 
right  has  A?    (Stokes  v.  Continental  Trust  Co.,   186  N.  Y.  285.) 

2.  If  the  treasury  stock  had  been  sold  to  the  syndicate,  would 
your  answer  be  different? 


54  PROBLEMS  IN  PRIVATE  FINANCE 

3.  If  the  company  had  merged  with  another  corporation  and  had 
given  the  new  $2,500,000  worth  of  stock  in  exchange  for  the  stock 
of  the  other  corporation,  would  A  have  had  any  right  to  subscribe 
to  the  new  stock  ? 

4.  In  June,  1911,  American  Telephone  and  Telegraph  stock  was 
selling  at  150.    What  was  the  value  of  the  right  referred  to  on  p. 
1014?   (See  p.  XV  of  MATERIALS.  ) 

5.  What  disposition  could  you  make  of   the  rights   in  problem 
4,  or  how  could  you  "cash  your  privilege"? 

6.  Is  the  common  or  preferred  stock  of  the  following  companies 
an  investment  as  investment  is  defined  in  the  SYLLABUS?    May  De- 
partment Stores  (p.  767)  ;  Bethlehem  Steel  Corp.  (p.  761)  ;  Ameri- 
can Smelting  &  Refining  Co.  (p.  759)  ;  Chicago,  Milwaukee  &  St. 
Paul  R.  R.  Co.   (p.  753)  ;  Midwest  Refining  Co.   (p.  766)  ;  United 
Light  and  Power  Co.  (p.  764). 

7.  Are  the  Chicago,  Milwaukee  &  St.  Paul  general  4's  legal  in- 
vestments under  the  laws  of  the  State  of  New  York?    (pp.  753-758, 
and  pp.  447-54.) 

8.  Why  did  the  B.  and  O.  pay  dividends  in   1908   (pp.  625-6), 
although  they  were  not  earned  in  that  year  ? 

9.  You  have  patented  a  new  toy  that  will  cost  about  5  cents  to 
manufacture  and  will  sell  at  about  $1.   Describe  fully  how  you  would 
go  about  financing  the  proposition. 

10.  Why  is  the  practice  of  selling  securities  to  customers  more 
appropriate  for  public  utilities  than  for  industrials? 

11.  What  are  the  earmarks  of  a  fraudulent  prospectus? 

(This   requires   a   comparative    study   of    fraudulent   and   honest 
prospectuses  given  on  pp.  367-404.) 

12.  Point  out  the  fallacies  in  the  argument  on  p.  398. 

13.  What  has  happened  to  the  business  described  on  pp.  399- 
403,  and  why  ? 

14.  Draw  up  a  bond  circular   for  the  bonds  of  the   Mortgage 
Bond   Co.    (pp.   255-298)    similar   to   the   circular    for   the    Jones- 
Laughlin  Steel  Company  bonds  (pp.  374-6).   Omit  the  letter. 

15.  Submit  in  writing  a  three-inch  one-column  advertisement  for 
one  of  the  above  mentioned  bonds.    Indicate  the  layout  by  lines  and 
give  the  wording  separately.    Make  the  advertisement  dignified,  but 
play  up  stfongly  in  the  headline  the  most  important  reason  for  buying 
the  bond. 


56  PROBLEMS  IN  PRIVATE  FINANCE 

16.  What,  in  brief,  are  the  requirements  for  listing  securities  on 
the  New  York  Stock  Exchange?    (See  pp.  151-61.) 

17.  What  is  the  advantage  of  listing  securities  on  the  stock  ex- 
change,  (a)   to  the  underwriters  of  a  new  issue,   (b)   to  the  cor- 
poration ? 

CHAPTER  XV 

1.  Which  of  the  methods  of  underwriting  does  the  agreement  of 
the  underwriting  syndicate   of   the   Republic   of   Cuba   5  per  cent 
Gold  Bonds  of  1904  illustrate?    (pp.  405-411.) 

2.  If  the  bonds  of  the  Republic  of  Cuba,,  during  their  sale  by 
the  syndicate,  were  to  be  offered  by  outside  purchasers  at  a  price 
below  that  being  asked  by  the  syndicate  managers,  what  could  they 
do?    (pp.  405,  et  seq.,  and  p.  435.) 

3.  If  you  were  a  subscriber  to  the  extent  of  $1,000,000  in  the 
agreement  referred  to  in  the  first  problem,  what  would  be  your 
possible  maximum  loss? 

4.  Suppose  the  Chicago  Telephone  Company,  in  1911,  increased, 
its  capital  stock  by  $5,000,000   (p.  865)  ;  a  syndicate  was  formed 
to  underwrite  the  sale  of  the  new  stock  and  you  participated  to  the 
extent  iof  $500,000.   What  would  be  your  maximum  loss? 

5.  If  the  bonds  in  problem  1  were  not  sold  quickly  enough  to 
raise  the  money  as  the  Republic  of  Cuba  required  it,  what  could  the, 
managers  of  the  syndicate  do?    (pp.  405-411;  see  also  p.  769-782.), 

6.  Suppose  instead  of  the  bonds  mentioned  in  the  letter  on  p. 
769,  it  had  been  proposed  to  buy  $1,500,000  worth  of  the  Jones- 
Laughlin  mortgage  bonds  (pp.  183  et  seq.).    Draw  up  the  complete 
agreement  between  the  parties  (pp.  771  et  seq.).    Note:  Where  a 
clause  is  to  be  copied  verbatim  from  the  book  you  can  indicate  it  as 
follows:  "Here  follows  the  3rd  paragraph  on  p.  781";  where  blanks 
have  to  be  filled  in  or  changes  made,  give  the  text  of  your  agreement 
in  full. 

7.  Outline  very  briefly  the  salient  features  of  an  agreement  (a) 
between  the  manager  of  a  syndicate  and  a  company  about  to  build, 
within  10  months  20  miles  of  interurban  railway  track  at  $50,000 
a  mile,  and  (b)  between  the  manager  and  the  participants. 

8.  Would  you  have  advised  the  American  Telephone  and  Tele- 
graph Co.  (p.  1014)  to  have  the  sale  of  its  new  stock  underwritten 
by  bankers,  assuming  that  the  market  price  of  the  old  stock  at  that 
time  was  150? 


58  PROBLEMS  IN  PRIVATE  FINANCE 

CHAPTER  XVI 

1.     A  corporation  proposes  to  market  a  new  adding  machine;  the 
following  estimates  are  made  after  careful  investigation: 

Cost  of  manufacture $15 

Administrative  expenses   

Selling  expenses 35 

Collection  expenses  and  loss :  $1  a  month  for  10  months.  ...        10 


Total  expense $75 

Retail  selling  price   100 

Net  profit    $25 

Terms  of  payment:  $10  down,  $10  a  month. 

Volume  of  business :    50  machines  per  month  during  1st  2  mos. 

150  2d2mos. 

300          "  "  "         3d  2  mos. 

500  "          thereafter. 

What  will  be  the  working  capital  required? 

2.  What    factors   are   likely   to   raise   or   lower   your   estimated 
working  capital  in  the  above  problem,  and  why  ? 

3.  Calculate  the  aggregate  profits  that  will  be  realized  up  to  the 
time  the  working  capital  is  exhausted  and  the  company  is  carrying 
its  business  on  income  alone. 

4.  What   factors  affect  the  amount  of   working  capital   of  the 
May  Department  Stores?   (pp.  767-768.) 

5.  From  the  balance  sheet  (pp.  761-763),  can  you  tell  how  the 
Bethlehem  Steel  Company  financed  its  inventory  increases  in  1917? 

6.  What  was  the  turnover  of  (a)  merchandise,  and  (b)  working 
capital,  of  that  company? 

7.  Is  it  profitable  for  that  company  to  borrow  working  capital 
from   its  bank   in   order   to   discount   its   accounts   payable?    Give 
illustration. 

8.  If  you  reckon  that  there  is  one  chance  in  ten  of  the  failure 
of  each  of  two  obligors  on  a  promissory  note,  what  are  the  chances 
that  the  note  will  not  be  paid  ? 

9.  Why  has  single-name  paper  predominated  over  double-name 
paper  in  the  investments  of  American  banks? 

10.  What  kinds  of  commercial  paper  can  a  member  bank  redis- 
count at  its  Federal  Reserve  Bank  ? 


60  PROBLEMS  IN  PRIVATE  FINANCE 

11.  What  is  the  advantage  to  a  merchant  of  selling  his  notes 
through  note-brokers,  and  why  do  banks  prefer  to  buy  much  of  their 
paper  through  a  recognized  reputable  note-broker? 

12.  What   is   the  advantage   of    registering   commercial   paper? 
(pp.  907-8.) 

13.  Are  the  accounts  in  the  agreement  (pp.  408-9)  assigned  out- 
right or  by  way  of  collateral? 

14.  What  is  a  "bankable  proposition"? 

15.  A  has  a  contract  with  the  X  Company  to  purchase  its  refuse 
at  a  very  low  figure — $50,000  a  year.    He  can  utilize  the  refuse 
and  sell  the  resulting  product  for  $200,000  a  year,  making  a  profit  of 
$50,000  a  year,  after  deducting  all  operating  expenses  and  6  per  cent 
on  the  capital  required.   In  order  to  do  this,  he  must  build  and  equip 
a  factory  at  a  cost  of  $500,000.    (a)  How  much  money,  in  -all,  will 
he  require?    (b)  How  can  he  raise  the  money  necessary? 

16.  Debate   the   following  question:     Resolved,   that   the   trade 
acceptance  provides  a  better  method  of  financing  sales  in  America 
than  the  system  of  "open  accounts." 

CHAPTER  XVII 

1.  Can  you  tell  from  the  income  statement  and  balance  sheets  of 
the  May  Department  Stores    (pp.   767-768)    what  disposition  was 
made  of  the  profits  of  1918? 

2.  Are  the  reports  of  this  and  other  companies  usually  written 
up  on  an  "accrual,"  or  "cash,"  basis?   Why? 

3.  The  Midwest  Refining  Company  furnishes  no  income  account. 
By  comparing  its  balance  sheets  (p.  766),  show  its  annual  net  income, 
amount  reserved  for  depreciation  and  for  war  taxes,  and  the  balance 
available   for   dividends  in    1915,    1916  and    1917.    The   dividends 
paid  during  these  years   were  as   follows:    1915,  $720,000;    1916, 
$1,353,520;  1917,  $1,711,167. 

4.  Show  by  a  series  of  balance  sheets  how  depreciation  of  an 
asset  worth  $10,000  is  provided  for  in  five  equal  installments  and' 
how,  at  the  end  of  the  life  of  the  asset,  the  reserve  is  used  to  re- 
place it. 

5.  Explain  very  briefly  what  the  Chicago  Telephone  Companies 
did  to  maintain  their  property  (pp.  799-811.) 

6.  Does  Mr.  Bemis  conclude  that  the  provisions  made  for  main- 


62  PROBLEMS  IN  PRIVATE  FINANCE 

tenance — present  and  deferred — were  sufficient  to  maintain  the  value 
of  the  company's  investment?    (pp.  799-858.) 

7.  Can  you  see  any  fallacies  in  Mr.  Byllesby's  argument?    (pp. 
899-901.) 

8.  Suggest   kinds   of    companies    for    which,    respectively,    each 
method   of   calculating   depreciation   referred   to   in  the    SYLLABUS 
would  he  preferable.   Give  reasons  for  each  example. 

CHAPTER  XVIII 

1.  From    the    standpoint   of    financial    expediency,    from    which 
sources  of  surplus  (SYLLABUS,  p.  52)  may  dividends  be  declared? 

2.  If  the  Midwest  Refining  Company  (p.  766)  were  to  write  up 
its  "property,  leases  and  contracts"  by  $10,000,000,  would  the  amount 
thus  added  to  the  assets  be  income  subject  to  taxation  under  the 
Federal  Income  Tax  ? 

3.  What,  probably,  is  the  purpose  of  each  of  the  " funds"  men- 
tioned on  page  624?   Are  these  so-called  "funds"  reserves,  or  funds, 
as  those  words  are  used  in  American  practice? 

4.  What  are  all  the  advantages  of  a  large  surplus   (a)   to  the 
corporation;  (b)  to  the  stockholder? 

5.  Why  are  regular  dividends  desirable  from  the  standpoint  of 
(a)  the  stockholder  and  (b)  the  corporation? 

6.  Prove  that  the  interest  on  a  6  per  cent  bond  for  fifteen  years 
is  worth  more  than  the  rest  of  the  bond — principal  and  interest — 
no  matter  how  long  the  bond  has  to  run. 

7.  A  corporation  presents  to  its  directors  at  the  end  of  its  first 
fiscal  year  the  following  condensed  statement  : 

BALANCE  SHEET 

Assets  Liabilities 

Cash   $33,600      Accounts  Payable $67,200 

Accounts  Receivable.  . .  57,000      Notes  Payable 12.000 

Inventories 50,400     Accrued  Wages 4,800 

Plants  and  Machinery.  .  93,000      Capital  Stock 120,000 

Patent  Rights   30,000      Surplus 60,000 


$264,000  $264,000 


64  PROBLEMS  IN  PRIVATE  FINANCE 

Income  and  Expenditures  Statements 

Gross  Sales   $560,000 

Deductions  from  Sales   22,800 


$537,200 
Operating  Expenses    335,100 


Manufacturing  Profit    $202,100 

Selling  Expenses    105,000 


Gross  Profit $97,100 

Administrative  Expenses 36,000 


Gross  Income   $61,100 

Taxes  and  other  deductions 1,100 


Net  Surplus  for  Year  $60,000 

The  three  directors  of  the  company  are  not  agreed  as  to  the 
correct  dividend  policy  for  the  year :  one  votes  to  pay  out  a  20 
per  cent  cash  dividend,  another  is  in  favor  of  a  40  per  cent  stock 
dividend,  and  the  third  believes  the  company  should  pay  no 
dividend  at  all.  What  would  you  favor? 

8.  Would  your  answer  in  the  above  problem  be  changed  if  the 
company  intended  to  expand  its  business  through  the  sale  of  $50,000 
capital  stock  to  outsiders  at  par  ? 

9.  Under  what  circumstances  would  you  advise  the  payment  of 
a  dividend? 

10.  The  balance  sheet  of  the  X  Company  may  be  simplified  as 
follows : 

Land $120,000     Capital  Stock $500,000 

Building  and  Machinery  130,000      Debts    140,000 

Inventories 220,000 

Receivables 110,000  $640,000 

Cash   10,000 

Profit  and  Loss  .  50,000 


$640,000 


66  PROBLEMS  IN  PRIVATE  FINANCE 

The  company  is  three  years  old,  has  never  declared  a  dividend, 
but  has  made,  through  war  orders,  a  profit  for  the  year  of  $40,000. 
It  is  anxious  to  pay  a  dividend.  How  may  it  do  so? 

11.  On  March  1,  Company  A  declares  a  dividend  as  of  March 
15,  payable  April  15.  X  was  the  owner  of  a  certificate  for  100  shares 
of  stock  on  February  28.   On  March  5  he  sold  the  certificate  to  Y, 
who  sold  the  certificate  to  Z  on  April   1.    Who  is  entitled  to  the 
dividend?  Would  your  answer  be  changed  if  these  transactions  had 
been  made  through  the  New  York  Stock  Exchange?    (pp.  126-49.) 

12.  What  is  meant  by  the  item  "Dividends  unclaimed  and  pay- 
able" on  p.  760?    How  could  the  company  give  this  indebtedness 
priority  over  the  item  listed  above  it :  "Int.  on  deb.  bds."  ? 

13.  A  died  in  1910,  leaving  $2,000,000  stock  in  corporation  M 
to  X,  in  trust  for  L  for  life,  remainder  to  Z.     Company  M  pays 
regular  dividends  of  6  per  cent,  but  in  1916  distributes  a  50  per  cent 
dividend.   What  should  X  do  with  the  money  received?  The  impor- 
tant facts  from  the  balance  sheets  for  the  two  years  are  as  follows : 

1910  1916 

Assets    $25,000,000  $32,000,000 

Stock  12,000,000  12,000,000 

Debts 10,000,000  13,000,000 

Surplus   3,000,000  7,000,000 

14.  This  is  a  summarizing  and  review  problem: 

(1)  Enumerate  very  briefly  and  concisely  all  the  purposes  for 
which  a  corporation  may  need  funds. 

(2)  Enumerate  very  briefly  all  the  sources  from  which  funds  can 
be  derived. 

(3)  Enumerate  very  briefly  the  agencies  through  which  each  of 
the  sources  mentioned  in  the  previous  problem  can  be  reached. 

CHAPTER  XIX 

1.  Is  the  Millbrook  Company  (p.  760)  insolvent  under  the  defi- 
nition of  insolvency  contained  in  the  Bankruptcy  Law? 

2.  Why  did  the   Pacific  Gas  and  Electric   Company    (pp.  929- 
932)  readjust  its  capital  account? 

3.  Did  the  readjustment  of  the  capital  account  of  the  Hudson 
and  Manhattan  Railroad  Company  increase  or  decrease  the  capital- 
ization?   (pp.  932-937.) 


68  PROBLEMS  IN  PRIVATE  FINANCE 

4.  What  objects   were  sought  to  be  effected  by  the  readjust- 
ment  of   the   Hudson   and    Manhattan   Railroad    Company?      (pp. 
933-965.)    How  were  the  objects  attained  under  the  readjustment? 

5.  Prepare  a  table  of  the  claims  against  the  B.  and  O.  in  the 
order  of  their  priority  (pp.  966-1000),  and  show  how  these  priorities 
were  respected  in  the  reorganization  agreement. 

6.  In  1897,  the  highest  prices  that  could  be  obtained  for  Balti- 
more and  Ohio  common,  first  preferred  and  second  preferred  were 
respectively   21,    45    and   25.     In    1900,    the    Baltimore   and    Ohio 
common  sold  from  58^4  to  89%,  and  preferred  from  72^  to  90. 
Assume  money  is  worth  4l/2  per  cent. 

Refer  to  the  Baltimore  and  Ohio  reorganization  agreement  (pp. 
966-1000),  and  then  answer  the  following  questions,  showing  all 
computations  used  in  arriving  at  your  conclusion: 

(a)  Would  it  have  paid  you  to  have  sold  your  common  stock  in 
1897   or   to   have   held    it,    gone    through   the    reorganization   and 
sold  in  1900? 

(b)  Would  it  have  paid  you  to  have  sold  your  first  preferred 
stock  in  1897,  or  to  have  held  it,  gone  through  the  reorganization 
and  sold  in  1900? 

(c)  Would  it  have  paid  you  to  have  sold  your  second  preferred 
stock  in  1897,  or  to  have  held  it,  gone  through  the  reorganization  and 
sold  in  1900? 


BOOK  ISDUEON 


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UNIVERSITY  OF  CALIFORNIA  UBRARY 


